Hickman Motors Ltd., a vehicle dealership, bought certain machinery assets from its defunct subsidiary, Hickman Equipment Ltd., on December 28, 1984, and resold the assets to a third party on January 2, 1985. As a consequence of the short-term ownership of these assets, Hickman Motors applied for the capital cost allowance on account of one year’s depreciation. The claim for the capital cost allowance of Hickman Motors was rejected by the Minister of National Revenue in that the assets were bought not for income production, but rather for the purpose of resale to a third party.
The issue went up all the way to the Supreme Court of Canada, and in 1997 the court ruled in favor of Hickman Motors Ltd. in a split decision. La Forest, McLachlin, and Major JJ held that notwithstanding the short period of ownership of the assets by Hickman Motors Ltd., the assets were primarily used to produce income:
Since the property was depreciable property in the hands of Hickman Equipment just prior to the winding-up, it is deemed to be acquired by the appellant as depreciable property — i.e., for the purpose of gaining or producing income. So long as the appellant did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remained eligible for a capital cost allowance deduction. There was no evidence that this occurred. The fact that the assets produced revenue establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(c). The fact that the revenue was small or earned over a short period of time does not take it out of this category.
L’Heureux-Dubé agreed that the appeal was allowed, but on the sole ground that Hickman Motors produced evidence undisputed by the Minister to the effect that it indeed conducted equipment business from December 28, 1984 to January 2, 1985. Thus:
“The evidence, viewed as a whole, shows that the appellant has discharged its burden of proving that it did in fact actively carry on the equipment-related business.”
Despite the limitation of this precedent as determined by L’Heureux-Dubé, the fact remains that the burden of proof falls upon the Minister to demonstrate that a capital cost allowance claim is not reasonable.
Decided by the Supreme Court of Canada on June 26, 1997.
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